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Lack of seamless supply chain could hit farmers, consumers

The government has raised the pitch for opening up the country's retail sector for foreign direct investment (FDI) but industry watchers cautioned that the expected gains to farmers and consumers can only come through a seamless back-end supply chain, which is still some distance away.

business Updated: Jul 26, 2010 01:43 IST
Vivek Sinha

The government has raised the pitch for opening up the country's retail sector for foreign direct investment (FDI) but industry watchers cautioned that the expected gains to farmers and consumers can only come through a seamless back-end supply chain, which is still some distance away. In Cold Storage

Lack of clarity on government policy on FDI in retail may have forced logistics majors to defer planned investment to set up cold-chains and warehouses across India. This means that prices of goods may not plunge immediately after the flood-gates for foreign investment are opened for deep-discount retail mega stores, experts said.

"Only after five years when a company had been investing into the development of its back-end operations can it be in a position to impact prices," said Arvind Singhal, chairman of consulting firm Technopak Advisors.

In a discussion paper released earlier this month, the department of industrial policy and promotion (DIPP) said FDI in retail may be an efficient means of addressing the concerns of farmers and consumers.

"Opening FDI in retail could also assist in bringing technical know-how to set up efficient supply chains, which can act as models of development," the discussion paper said.

The price advantage for consumers and agriculture income gains will only kick-in once retailers start procuring directly from farmers through an efficient supply chain.

Hindustan Times carried out an on-the-spot assessment in Amritsar in Punjab, India's grain bowl, of how a retail supply chain works and gains from it.

"The corporate retail chains are very touchy on the quality of fruits and vegetables," Avinash Singh, a middleman (aarhatiya) at the local fruits and vegetable mandi at Amritsar told HT. "A minor blemish on the produce and they simply drop it."

Singh added that middlemen such as him usually keep the best produce for their corporate retail customers who purchase in bulk from the mandis.

"At least 75 per cent of the fruits and vegetables sold at organised retail outlets around the city are procured from the local mandis at existing mandi price," Singh added.

Wal-Mart, the world's largest retailer which has set up a cash-and-carry wholesale store in Amritsar, confirmed that it does source from the local mandis but added a major portion of perishable fruits and vegetables are sourced directly from the farmers.

"If the corporate retailers develop their own back-end infrastructure the price of perishables will come down by at least 15-20 per cent. Also there will not be any short-term spike in prices," said Singhal.

Domestic corporate retailers have so far chosen to adopt an ad hoc mix of mandis and farmers meet their supply needs, rather then invest in dedicated cold-chain infrastructure allowing them to offer offered discounts in bits and pieces.